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Colonial Bancgroup subprime shareholder derivative action dismissed

On July 20, 2009, the US District Court for the Northern District of Alabama granted the defendants motion to dismiss in a shareholder derivative action that named the directors and officers of Colonial Bancgroup as defendants. Playford v. Lowder et al., C.A. No. 09-182-WO (M.D. Ala.). The complaint alleged that the defendants withheld information concerning the $300 million in equity that the government required Colonial to raise in order to participate in TARP and engaged in other misrepresentations and failures of oversight particularly related to Colonial’s mortgage-related exposure. On that basis, the complaint asserted causes of action for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment.

In granting the defendants' motion to dismiss, the court rejected the plaintiffs' arguments that a demand would have been futile because each of the director defendants faced a substantial likelihood of liability and that the directors lacked "independence." With respect to the argument that the defendants faced a "substantial likelihood of liability," the court held that the plaintiffs were required to overcome the hurdles of proving that the directors acted in "bad faith" and pleading particularized facts indicating that they acted with "scienter" because Colonial's charter exculpated the directors from liability based on the breach of the duty of care. In particular, the court held that the defendants had failed to allege any facts suggesting that the board “utterly failed” to implement internal controls. Additionally, the court found that the complaint failed to allege particularized facts suggesting that any members of the board, other than Lowder, were involved in the release of any of the alleged false and misleading statements, let alone that a majority of the board had knowledge of the falsity of the information contained in those statements. The court also found that the complaint failed to plead that a majority of the directors lacked "independence." The court concluded that the defendants' significant ties to Auburn University and donations to Colonial's political action committee did not raise the specter of specific personal and business entanglements that would prevent them from impartially considering a demand.